Bluffton Pharmacy

Two New Pharmacy Owners Learn Valuable Lessons About Financial Statements and Analysis

It has been a little more than two years since Angela Crawford and Martin Rodriguez purchased the Bluffton Pharmacy from Frank White, the previous owner and founder, who had started the pharmacy in 1969. The two have spent many long hours in the store and have learned many valuable lessons as business owners that they had not had the opportunity to learn as employees of large chain pharmacies where they had previously worked.

Crawford and Rodriguez just received an e-mail from their accountant that contained the balance sheet and the income statement for Bluffton Pharmacy for the fiscal year that has just ended. The two financial statements appear below.

Bluffton Pharmacy
Balance Sheet, December 31, 20XX
	Assets
Current Assets
Cash	$74,473
Accounts Receivable	$112,730
Inventory	$224,870
Supplies	$ 21,577
Other Assets	$ 10,202
Total Current Assets	$443,851
Fixed Assets
Autos, net	$ 33,156
Equipment, net	$ 35,706
Furniture and Fixtures, net	$ 16,323
Total Fixed Assets	$ 85,185
Total Assets	$529,036
	Liabilities
Current Liabilities
Accounts Payable	$29,585
Notes Payable	$70,902
Line of Credit Payable	$32,136
Total Current Liabilities	$132,623
Long-term Liabilities
Note Payable	$170,880
Loan	$93,346
Total Long-term Liabilities	$264,226
	Owners Equity
Crawford and Rodriguez, Capital	$132,187
Total Liabilities and Owners Equity	$529,036

Bluffton Pharmacy
Income Statement December 31, 20XX
Prescription Sales Revenue		$2,228,767
All Other Sales Revenue		$ 167,757
Total Sales		$2,396,524
Cost of Goods Sold
Beginning Inventory, 1/1/xx	$ 169,578
+ Purchases	$1,938,097
Goods Available for Sale	$2,107,675
- Ending Inventory, 12/31/xx	$224,870
Cost of Goods Sold		$1,882,805
Gross Profit		$513,719
Operating Expenses
Utilities	$10,305
Rent	$35,948
Advertising	$9,586
Insurance	$9,586
Depreciation	$5,033
Salaries and Benefits	$321,134
Computer and E-commerce	$11,983
Repairs and Maintenance	$28,758
Travel	$4,793
Professional Fees	$3,595
Supplies	$5,991
Total Operating Expenses		$446,712
Other Expenses
Interest Expense	$24,879
Miscellaneous Expense	$374
Total Other Expenses		$25,253
Total Expenses		$471,965
Net Income		$41,754

To see how their pharmacys financial position has changed since their first full year of operation, Crawford and Rodriguez want to calculate 12 financial ratios. They also want to compare Bluffton Pharmacys ratios to those of the typical small pharmacy in the industry. The table below shows the value of each of the twelve ratios from last year and the industry median for small pharmacies.

Ratio Comparison
Ratio	Bluffton Pharmacy		Pharmacy Industry Median*
	Current Year	Last Year
Liquidity Ratios
Current ratio		3.41	4.71
Quick ratio		1.72	2.42
Leverage Ratios
Debt ratio		0.70	0.62
Debt-to-Net-Worth ratio		2.23	2.1
Times Interest earned ratio		3.04	3.9
Operating Ratios
Average Inventory Turnover ratio		10.90	11.7 times/year
Average Collection Period ratio		14.0	15.0 days
Average Payable Period ratio		5.0	14.0 days
Net Sales to Total Assets ratio		4.75	4.68
Profitability Ratios
Net Profit on Sales ratio		1.94%	2.9%
Net Profit to Assets ratio		9.20%	8.2%
Net Profit to Equity ratio		29.21%	48.0%
*from Risk Management Association Annual Statement Studies and National Community Pharmacists Association

Lets see how our ratios compare to last years numbers, says Angela.

I hope were headed in the right direction, says Martin.

Theres only one way to find out, says Angela with a slight hint of tension in her voice.

Questions

1. Calculate the 12 ratios for Bluffton Pharmacy for this year.

2. How do the ratios you calculated for this year compare to those for the pharmacy last year? What factors are most likely to account for these changes?

3. How do the ratios you calculated for this year compare to those of the typical company in the industry? Do you spot any areas that could cause the company problems in the future? Explain.

4. Develop a set of specific recommendations for improving the financial performance of Bluffton Pharmacy, using the analysis you conducted in questions 13.